This is a long post, but well worth reading for anyone interested in the workings of Groupon. It shows a long history with Groupon and it does a great job balancing the good and the bad. It also shows some of the broader economic impacts of Groupon on the small business ecosystem.

The email is presented unedited, with the exception of typo fixes and a few changes to adhere to U.S. conventions. (e.g. 2.000 to 2,000)

My summary:

The spa used Groupon to fill holes caused by drop in demand while the hotel the spa was in was under renovation.

Johny extensively negotiated with Groupon and pushed them for better deals. Although Johny asked me not to publish his commission to Groupon, I can say it’s less than the typical 50/50 split. His prominent location helped with that.

Groupon customers pay less, demand more.

There was a lot of organizational confusion at Groupon.

He aggressively tried to get contact information for followup.

He saw lower return rate for Groupon customers than what Groupon stated.

Groupon expanded the market of people willing to consider spas in the area.

He believes that in the long term, discounts need to go down for it to be sustainable for businesses and for Groupon.

Groupon has created a new, lower pricepoint in the mindset of consumers that is hard to change.

Increasingly, Groupon customers are tourists. This all but eliminates the chance of repeat business and runs counter to the value proposition that Groupon puts forth to merchants. He believes that Groupon should restrict these purchases.

Johny was able to negotiate to keep revenue from unredeemed Groupons. That is generally the case in the U.S. and Canada but is not typical for the rest of the world.

I started using daily deal sites in beginning of 2010, our business was bit on rocky road, mostly due to problems with our hotel where we are situated which was undergoing big renovation and we noticed big drop in business. I was preparing all of us for a tough year.

First we did 2 small deals with Daily Deal, sold all together 50 pcs, than I went with CityDeal (acquired by Groupon few months later).

First deal with Groupon went really well, we sold over 240 pcs and I was very impressed. We are small wellness and usually we sell 20-30 vouchers a month so this was big deal for us.

Regardless good sale my first experience with them was quite mixed, they really showed huge potential, unlike anything else, and I do have lots of experience with Adwords, Facebook Ads etc, but they also showed enormous organizational confusion. I wasn’t sure whether I should continue or not but they were very keen to keep us because we had one of the best addresses in town and we were selling 3-4 times more than any other wellness. This made it easier for me to negotiate and push them a bit to make some changes and I can proudly say that many of major system improvements in early stage were probably coming from my initiative. I used to tell them that they are running a cowboy business, an expression which they used often those times, admitting that their system is far from perfect.

So what were their main mistakes in beginning? I will just name few of them:

Total confusion with codes, sometimes they will issue several vouchers with same codes and we get paid for one only.

Their email confirmation to costumers were not good enough, I insisted to add business address, map etc.

Payments were late, incorrect, didn’t match with codes etc.

After we would sell couple of hundreds vouchers they would provide us list of codes in PDF, totally unusable, so I demanded for excel version.

and many, many other things

All these things by time got improved but the worst for me were the provision [commission] conditions.

In beginning was relatively fine but than on each next deal they would come with higher provision and asking for more discount. Also the fact that they keep money from non-redeemed vouchers was for me unacceptable. By time I manage to get things in some normality and I was able to make profit on each deal which was most important for me because customer return rate, which they claim is really high, was actually very low.

In meantime I upgraded my booking system so I can accept online bookings so each Groupon costumer was directed to make reservation online. This saved us awful lots of time and on long term it paid off really well because I was able to start shooting my own deals to over 2,000 new email addresses 12 months later.

But then came one very upsetting moment which almost made me quit for good. I don’t want to go into details here, I can only say that involved sudden change in the way how they calculate tax and they were covering it as administrative adjustment. They also told me that this will not affect my income because I would get money back from tax office. I checked the whole thing with my accountant and he insured me that this is not the case. After few days of hot discussion with their CEO I manage to get full amount for my deal but I was very careful from that point and I insured them that one more incident like this and I will stop cooperation.

I’m not sure what actually happened there, maybe a forced order coming from USA, so I can’t really say they were trying to cheat us but definitely they could use more sensibility to apply those changes. This was cowboy business on its peak.

Then, to mix things around, I decided to give Groupon a little push by doing something they hate the most, I did a deal with Daily Deal! Oh boy, how that worked. They called for meeting next day and sales person even brought a co-founder to help out. At that point game changed a bit and I was able to bring provision back to some kind of normality. It was not ideal but I knew soon all this craziness with daily deals will settle and merchants will be able to negotiate better deals. My target was Christmas because I knew we can sell tons of vouchers and redeem rate will be very low because most of them will end up as presents, and you know what happens with most of the presents, they just go into the wrong hands :-). It’s just how the voucher game goes during those times.

I have to say that sales representative did really good job and he was taking care a lot about us. He is what sales person should be, making sure that it make sense for both sides. Problem was that many situations were completely out of his hands and he felt few times bit uncomfortable with it but we always manage to find good solutions. Sales people here have double or triple pressure, they have to handle demands from management plus additional control from USA which is even more demanding. At the same time they have to make merchants happy and provide good deal to the users. It’s very hard job and many times I felt I should offer my sales guy a massage before we start talking because he looked finished 🙂

After Christmas I went bit slower with deals and decided for every three months pace and not every 6 weeks. Renovations in our hotel were finished so we had more “normal” clients coming in.

So in the end what can I say, Groupon saved our ass when we really needed, they did loads of mistakes, strange maneuvers and many things were simply not transparent but we manage to stick together, probably only because of our sales representative who showed good skills to balance things and find good solutions.

Since this month we have new sales person and will see how that will go. I have put deals on hold for some time, I want to be sure that my business can handle it, but I’m not even sure whether I want to do it at all. Since January I started my own Last Minute deals,www.energyclinic.de/special, it works quite well and it’s filling the holes in our bookings exactly how we want.

I have to say that by being in hotel our situation is bit specific, no matter what, we always can count on business from hotel guests, paying full price. If my business is on the street I don’t think I would ever dare to do 10 deals within 1 year, it would destroy our existing clientele.

The good thing about daily deals is that they expanded all markets. If before Hamburg had 20,000 people going for massage once a month (guessing) now that number is probably 40,000. We got so many people who came first time for wellness treatment. The bad thing is that those kind of people are the biggest complainers, they demand a lot and rarely buy anything else beside their deal. I call them deal hunters. For comparison, our hotel guest who are paying full price almost never complain and they are happy to pay their price. What is also not good is that nowadays it’s almost impossible to sell anything locally if it’s not heavily discounted. This really worries me and I’m thinking of switching my business completely into high level service, targeting top society only and ignore masses.There are people who are willing to pay even 150 € for good massage, deal hunters are not willing to go over 50 €.

One more problem is emerging and these are tourists. I also now have a habit when traveling to another city to buy few deals, specially for restaurants, and save couple of hundred euros on food during my stay. The problem is that very likely I will never come back to those restaurants. I’m noticing more and more tourists booking treatments with us over Groupon. I could say that maybe 5% of all vouchers are coming from people from other cities and countries. This number will only increase once people get more familiar with whole concept.

I think that Groupon should regulate this and maybe put additional charge if you are buying a deal which is not from your city. Their iPhone app have “Now!” option which gives you opportunity to buy coupons and use it instantly. This kind of things will be used heavily by tourists and I don’t think that any business will benefit from those kind of clients.

There is also big difference if you are selling premium service, like massages in 5 star hotel, or you are selling mainstream services like average quality restaurants and wellness. By general rule, Groupon attracts “cheap” clients, these people are not familiar with high class service and they have no intention to ever come back unless you don’t give them another massive deal. It’s one time experience for them so they can tell their friends and family that they did something very unusual.

Because of all this I insisted to make profit on each deal and not just perform massive marketing with very low return rate.

I did all these deals because I had too, our business was jeopardized but my wife hated to give such silly discounts for one of the best massages in the country and I had to persuade her to handle it for some short time until our normal business comes back.

My main suggestion to every merchant out there, if you really want to go with daily deal sites than please invest some money into booking system like Spa Booker or Open Table. Otherwise you will kill yourself with work, your phone line will be fully occupied and, what is the worst thing, you will have no means to get those costumer back because you didn’t collect one single email address and you will have to go back to Groupon and buy traffic again. And this is exactly how I see Groupon at the moment, an email store. I will run maybe 2 deals a year, collect maybe 1.000 new email addresses and if I manage to keep 3% of them as regular clients than I can say it was successful.

A good booking system also helps you to run your own calculations on how much bookings you can take so you can avoid any surprises.

If you are doing deals often make sure that you are making profit on each, don’t just do marketing forever, you will eat your own legs like that.

I hope this will help people to understand more how it works from merchant side. Each story is different and we all have different conditions, I was lucky because we are situated in hotel, wellness business is relatively stable in those places, and I realized very early that booking system is the key and that Groupon is willing to be flexible to keep us, not just because of our premium address but also because of our ability to deal with any amount of sold vouchers. Being very well organized is crucial, otherwise don’t do it.

Also conditions which I pulled from Groupon were very unique. Many, many times Groupon told me not to tell anybody what kind of deal I have.

So why I’m telling all these things now (and actually I didn’t share exact details, we are still business partners and I respect that)?

I think it’s time that we, merchants, say that it’s enough of this crazy discount game and that we put things into healthy perspective. I want to be able to give maybe only 30% discount and I don’t think that any deal site should take more than 25-30% provision.Everything else is unsustainable for us and for Groupon in the end because they will not be able to make enough contracts with high quality merchants.

I always told them that they cannot treat every merchant the same, they have to build certain scheme and adjust provisions according to sales, product quality and discount. I made one for myself and I use it every time I negotiate with them. They always ask for more discount but the point is that in that case only they win while merchants get less money on each coupon. If they want more discount than they should lower down provision. They have to show more flexibility.

So there it is, a love-hate story between Energy Clinic and Groupon. When put all together I can say it was successful and Groupon have been proved as useful marketing channel but only if you put lots of effort, making sure that everything works, make proper calculations and you collect those email addresses. It was definitely a fun ride, we learned a lot, we upgraded our systems for handling higher volumes and I have to say 2010 was our best year ever, in revenue and profit, although in beginning of the year I thought that we might even go out of business considering hotel renovation. But it took awful lots of energy to keep everything going, our staff was on the edge of nerves and strength and I don’t think I want to go through that again.

Dealing with big masses is exhausting, can be very thankless job and it brings tons of problems. I’m not a person who runs away from problems but if I have a choice serving masses or just serve handful of extraordinary clients I would always go for latter. Groupon is not very suitable for high class services, it’s just not in their DNA. Like Google and social media, same thing 🙂

I hope one day there will be a deal site for wellness similar to http://www.jetsetter.com, an awesome site for hotel deals.

We will use our experience and new upgraded system to do things on our own now and take Groupon more like a side thing but they have to go down with prices and I encourage every merchant out there to be brave and demand better conditions and don’t just dance on their music which sounds like beautiful symphony because it can turn out into dramatic piece if you are not careful enough.

If we continue with daily deals at this pace we are seriously putting in danger all our markets, no matter whether is wellness, food, entertainment … But I do believe that everything in life gets balanced so will be with daily deal sites. So don’t panic and dig your heels while you negotiate your next deal, let’s put this runaway gorilla in control 🙂

For great power you need great responsibility. It’s applicable for both, Groupon and merchants 🙂